WASHINGTON (Reuters) – U.S. construction spending climbed more than expected in December, driven by a surge in single-family homebuilding. However, economic headwinds, including elevated mortgage rates and new trade policies, could dampen future growth in the residential sector.

According to data released Monday by the Commerce Department’s Census Bureau, overall construction spending increased 0.5% in December, following an upwardly revised 0.2% gain in November. Initial estimates had reported November spending as unchanged, but economists polled by Reuters had predicted only a 0.2% rise for December.

On a year-over-year basis, construction spending grew 4.3%, while the broader 2024 annual increase reached 6.5%, underscoring the resilience of the sector despite ongoing economic uncertainty.

Private Construction Strengthens, But Challenges Persist

Private-sector construction led the gains, with spending jumping 0.9% in December. Residential investment, a key driver of the economy, rose 1.5%, fueled largely by a 1.0% increase in single-family homebuilding.

For much of the past year, the housing market has been navigating a complex landscape of fluctuating demand, limited supply, and rising costs. Higher mortgage rates have put pressure on new construction, dampening affordability despite strong buyer demand. Builders had hoped for regulatory relief under President Donald Trump’s administration, but borrowing costs remain a concern.

Mortgage rates have climbed in tandem with U.S. Treasury yields, reflecting broader economic resilience and investor concerns that the administration’s trade and immigration policies could drive inflation higher. Analysts warn that inflationary pressures may limit the Federal Reserve’s ability to continue cutting interest rates this year.

The Fed, which began easing its policy stance in September, has already lowered rates by 100 basis points before pausing in January. This came after aggressive hikes in 2022 and 2023, totaling 5.25 percentage points, in an effort to rein in surging inflation.

Tariffs and Housing Affordability Concerns

New trade policies could add another layer of uncertainty to the housing sector. On Saturday, President Trump imposed 25% tariffs on Canadian and Mexican goods, a move that could raise the cost of lumber and other key construction materials.

Higher material costs could make new home construction more expensive, potentially limiting affordability at a time when high mortgage rates have already sidelined many buyers. While builders remain optimistic about long-term housing demand, sustained price increases could further constrain supply and push more prospective homeowners toward the rental market.

Multi-Family and Public Sector Spending Show Mixed Results

While single-family home construction showed strong gains, multi-family housing construction spending fell 0.3% in December. The decline comes amid reports that demand for rental housing is shifting as higher borrowing costs and inflation slow new investment in the sector.

Meanwhile, spending on home renovations increased, reflecting homeowners’ decisions to remodel rather than purchase new homes amid high financing costs.

In non-residential construction, private-sector investment in structures such as office buildings and factories edged up 0.1%. However, demand in this segment remains uneven as companies evaluate long-term workspace needs in a shifting post-pandemic economy.

Public construction spending declined 0.5% in December, as state and local government expenditures also dropped 0.5%. Federal construction spending decreased 0.2%, reflecting a slowdown in government-funded projects.

Outlook for the Construction Industry

While December’s data points to resilience in construction spending, analysts caution that sustained growth in 2024 will depend on multiple factors, including interest rate policy, material costs, and government infrastructure spending.

The residential sector, in particular, will likely be watching how the Federal Reserve navigates inflation concerns in the coming months. Any delay in rate cuts could keep mortgage rates elevated, discouraging new home purchases and limiting further expansion in construction.

Additionally, Trump’s trade policies could introduce new cost pressures that could impact affordability and project feasibility, particularly in the homebuilding sector.

For now, builders remain cautiously optimistic but recognize that policy shifts, both fiscal and monetary, will play a crucial role in shaping the industry’s trajectory for the remainder of the year.